UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10 - Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
or
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 001-13539
---------------------
AMF BOWLING, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-3873268
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8100 AMF Drive
Richmond, Virginia 23111
(Address of principal executive offices, including zip code)
--------------------
(804) 730-4000
(Registrant's telephone number, including area code)
--------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| . No _____.
At May 1, 1998, 59,707,450 shares of common stock, par value of $.01, of the
Registrant were outstanding.
PART I
Item 1. Financial Statements
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
March 31, December 31,
1998 1997
----------- -----------
Assets (unaudited)
------
Current assets:
Cash and cash equivalents $ 29,593 $ 35,790
Accounts and notes receivable, net of allowance for
doubtful accounts of $4,894 and $5,012, respectively 67,133 73,991
Inventories 67,444 56,568
Deferred taxes and other current assets 18,627 17,049
----------- -----------
Total current assets 182,797 183,398
Property and equipment, net 804,756 750,885
Leasehold interests, net 47,623 47,180
Deferred financing costs, net 17,930 18,911
Goodwill, net 771,342 772,348
Investments in and advances to joint ventures 24,564 19,999
Other assets 40,939 39,331
----------- -----------
Total assets $ 1,889,951 $ 1,832,052
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 32,900 $ 41,583
Accrued expenses 61,803 64,865
Income taxes payable 4,709 5,644
Long-term debt, current portion 29,251 27,376
----------- -----------
Total current liabilities 128,663 139,468
Long-term debt, less current portion 1,099,921 1,033,223
Other long-term liabilities 5,190 5,333
Deferred income taxes - -
----------- -----------
Total liabilities 1,233,774 1,178,024
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock (par value $.01, 200,000,000 shares authorized,
59,697,250 shares issued and outstanding at March 31, 1998,
59,630,000 shares issued and outstanding at December 31, 1997) 597 596
Paid-in capital 749,433 748,053
Retained deficit (75,679) (75,048)
Equity adjustment from foreign currency translation (18,174) (19,573)
----------- -----------
Total stockholders' equity 656,177 654,028
----------- -----------
Total liabilities and stockholders' equity $ 1,889,951 $ 1,832,052
=========== ===========
The accompanying notes are an integral part of these condensed
consolidated balance sheets.
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share data)
Three Months
Ended March 31,
-----------------------------
1998 1997
--------- ---------
Operating revenue $ 187,564 $ 157,589
--------- ---------
Operating expenses:
Cost of goods sold 38,857 38,050
Bowling center operating expenses 78,713 55,342
Selling, general, and administrative expenses 16,939 14,000
Depreciation and amortization 26,790 20,500
--------- ---------
Total operating expenses 161,299 127,892
--------- ---------
Operating income 26,265 29,697
--------- ---------
Nonoperating expenses (income):
Interest expense 25,974 27,672
Other expenses, net 573 1,509
Interest income (533) (685)
--------- ---------
Total nonoperating expenses 26,014 28,496
--------- ---------
Income before income taxes 251 1,201
Provision for income taxes 530 1,120
--------- ---------
Net income (loss) before equity in loss of joint ventures (279) 81
Equity in loss of joint ventures (352) -
--------- ---------
Net income (loss) $ (631) $ 81
========= =========
Net income (loss) per share - basic and diluted $ (0.01) $ 0.00
========= =========
Weighted average shares outstanding 59,661 42,323
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Three Months
Ended March 31,
-------------------
1998 1997
-------- --------
Cash flows from operating activities:
Net income (loss) $ (631) $ 81
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 26,790 20,500
Equity in loss of joint ventures 352 -
Deferred income taxes - (410)
Amortization of bond discount 5,667 8,301
Loss on the sale of property and equipment, net 269 106
Changes in assets and liabilities:
Accounts and notes receivable, net 7,287 (4,128)
Inventories (10,077) (10,265)
Other assets (2,047) (4,178)
Accounts payable and accrued expenses (15,802) 12,094
Income taxes payable (673) (1,029)
Other long-term liabilities (40) 2,495
-------- --------
Net cash provided by operating activities 11,095 23,567
-------- --------
Cash flows from investing activities:
Acquisitions of operating units, net of cash acquired (65,615) (33,641)
Investments in and advances to joint ventures (4,565) -
Purchases of property and equipment (11,641) (6,907)
Proceeds from the sale of property and equipment 104 215
-------- --------
Net cash used in investing activities (81,717) (40,333)
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt, net of deferred financing costs 72,000 29,002
Payments on long-term debt (9,093) -
Repurchase of shares - (500)
Issuance of shares 1,381 -
Payments of noncompete obligations (258) (166)
-------- --------
Net cash provided by financing activities 64,030 28,336
-------- --------
Effect of exchange rates on cash 395 (2,072)
-------- --------
Net (decrease) increase in cash (6,197) 9,498
Cash and cash equivalents at beginning of period 35,790 43,568
-------- --------
Cash and cash equivalents at end of period $ 29,593 $ 53,066
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization
The accompanying unaudited consolidated financial statements reflect all
adjustments (consisting of normal recurring accruals) which are, in the opinion
of management, necessary for a fair presentation of the results of operations
for the interim periods. The interim financial information and notes thereto
should be read in conjunction with the December 31, 1997 and 1996 audited
consolidated financial statements of AMF Bowling, Inc. ("AMF Bowling") and its
subsidiaries (collectively, the "Company") presented in AMF Bowling's Form 10-K
Annual Report for the fiscal year ended December 31, 1997 filed with the U.S.
Securities and Exchange Commission. The results of operations for the three
months ended March 31, 1998, are not necessarily indicative of results to be
expected for the entire year.
The Company is principally engaged in two business segments: (i) the
ownership or operation of bowling centers, consisting of 399 U.S. bowling
centers and 104 international bowling centers ("Bowling Centers"), including
fourteen joint venture centers described in "Note 8. Acquisitions", as of March
31, 1998, and (ii) the manufacture and sale of bowling equipment such as
automatic pinspotters, automatic scoring equipment, bowling pins, lanes, ball
returns, certain spare parts, and the resale of allied products such as bowling
balls, bags, shoes, and certain other spare parts ("Bowling Products"). The
principal markets for bowling equipment are U.S. and international bowling
center operators.
AMF Bowling Worldwide, Inc. ("Bowling Worldwide") is a wholly owned, direct
subsidiary of AMF Group Holdings Inc. ("AMF Group Holdings"). AMF Group Holdings
is a wholly owned, direct subsidiary of AMF Bowling. AMF Group Holdings and
Bowling Worldwide are Delaware corporations organized by GS Capital Partners II,
L.P., and certain other investment funds (collectively, "GSCP") affiliated with
Goldman, Sachs & Co. ("Goldman Sachs") to effect the Acquisition (defined
below). AMF Group Holdings and AMF Bowling are holding companies only. The
principal assets in each are comprised of investments in subsidiaries.
Pursuant to a Stock Purchase Agreement dated February 16, 1996, between AMF
Group Holdings and the stockholders (the "Prior Owners") of AMF Bowling Group
(the "Predecessor Company"), on May 1, 1996 (the "Closing Date"), AMF Group
Holdings acquired the Predecessor Company through a stock purchase by AMF Group
Holdings' subsidiaries of all the outstanding stock of the separate domestic and
foreign corporations that constituted substantially all of the Predecessor
Company and through the purchase of certain of the assets of the Predecessor
Company's bowling center operations in Spain and Switzerland (the
"Acquisition"). The purchase price for the Acquisition was approximately $1.37
billion. The Acquisition was accounted for by the purchase method of accounting,
pursuant to which the purchase price was allocated among the acquired assets and
liabilities in accordance with estimates of fair market value on the Closing
Date.
On November 7, 1997, AMF Bowling completed an initial public offering (the
"Initial Public Offering") of 15,525,000 shares of common stock (the "Common
Stock"), which trades on the New York Stock Exchange under the symbol "PIN". The
net proceeds of $279.1 million from the Initial Public Offering were contributed
by AMF Bowling to Bowling Worldwide and used by Bowling Worldwide to reduce and
refinance its bank debt pursuant to Bowling Worldwide's third amended and
restated credit agreement (the "Credit Agreement") and to redeem a portion of
Bowling Worldwide's senior subordinated discount notes.
As of March 31, 1998, the Company has acquired 212 bowling centers and
constructed one bowling center since the Acquisition for a combined purchase
price of $389.2 million. The Company has funded its acquisitions and center
construction from internally generated cash, borrowings under the senior secured
revolving credit facility (the "Bank Facility") under the Credit Agreement, and
issuances of Common Stock. See "Note 8. Acquisitions".
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 2. Significant Accounting Policies
Basis of Presentation
The condensed consolidated results of operations of the Company have been
presented for the three months ended March 31, 1998 and 1997, respectively. All
significant intercompany balances and transactions have been eliminated in the
accompanying condensed consolidated financial statements. All dollar amounts are
in thousands, except where otherwise indicated.
Goodwill
As a result of the Acquisition and subsequent purchases of bowling centers
discussed in "Note 8. Acquisitions", and in accordance with the purchase method
of accounting for all acquisitions, the Company recorded goodwill representing
the excess of the purchase price over the allocation among the acquired assets
and liabilities in accordance with estimates of fair market value on the dates
of acquisition. Goodwill is being amortized over 40 years. Amortization expense
was $5,037 and $4,900 for the three months ended March 31, 1998 and 1997,
respectively.
Comprehensive Income
Effective January 1, 1998, the Company adopted, as required, Statement of
Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive
Income." Comprehensive income for the three months ended March 31, 1998 was $768
and comprehensive loss for the three months ended March 31, 1997 was $3,889.
Note 3. Inventories
Inventories at March 31, 1998, and December 31, 1997 consisted of the
following:
March 31, December 31,
1998 1997
------------------- -------------------
(unaudited)
Bowling Products, at FIFO:
Raw materials $ 17,035 $ 15,283
Work in progress 2,379 2,279
Finished goods and spare parts 40,143 33,082
Bowling Centers, at average cost:
Merchandise and spare parts 7,887 5,924
------------------- -------------------
$ 67,444 $ 56,568
=================== ===================
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 4. Property and Equipment
Property and equipment at March 31, 1998, and December 31, 1997, consisted
of the following:
March 31, December 31,
1998 1997
--------------- ---------------
(unaudited)
Land $ 125,769 $ 113,629
Buildings and improvements 297,646 280,046
Equipment, furniture, and fixtures 489,822 444,437
Other 5,777 7,282
--------------- ---------------
919,014 845,394
Less: accumulated depreciation and amortization (114,258) (94,509)
--------------- ---------------
$ 804,756 $ 750,885
=============== ===============
Depreciation and amortization expense related to property and equipment was
$20,519 and $13,735 for the three months ended March 31, 1998 and 1997,
respectively.
Note 5. Long-Term Debt
Long-term debt at March 31, 1998, and December 31, 1997 consisted of the
following:
March 31, December 31,
1998 1997
--------------- ----------------
(unaudited)
Bank debt $ 682,268 $ 619,362
Senior subordinated notes 250,000 250,000
Senior subordinated discount notes 194,928 189,261
Mortgage and equipment notes 1,976 1,976
--------------- ----------------
Total debt 1,129,172 1,060,599
Current maturities (29,251) (27,376)
--------------- ----------------
Total long-term debt $ 1,099,921 $ 1,033,223
=============== ================
The Company's bank debt (the "Senior Debt") was incurred pursuant to a
credit agreement, dated as of May 1, 1996, and amended and restated in
connection with the Initial Public Offering, as of November 3, 1997, as the
Credit Agreement among Bowling Worldwide and its lenders. The Credit Agreement
provides for (i) three senior secured term loan facilities aggregating $455.3
million (the "Term Facilities") and (ii) the Bank Facility which provides for
borrowings up to $355.0 million on a revolving basis. At March 31, 1998, amounts
outstanding under the Term Facilities and Bank Facility were $437,156 and
$245,112, respectively.
Note 6. Commitments and Contingencies
Litigation and Claims
The Company is involved in certain lawsuits arising out of normal business
operations. The majority of these relate to accidents at bowling centers.
Management believes that the ultimate resolution of such matters will not have a
material adverse effect on the Company's results of operations or financial
position. While the ultimate outcome of the litigation and claims against the
Company cannot presently be determined, management believes the Company has made
adequate provision for possible losses.
Note 7. Employee Benefit Plans
AMF Bowling, Inc. 1996 Stock Incentive Plan
The total number of shares of Common Stock ("Stock Options") reserved and
available at March 31, 1998 for grant under the AMF Bowling, Inc. 1996 Stock
Incentive Plan (the "1996 Plan") was 1,767,151. At March 31, 1998, the number of
shares of Common Stock subject to Stock Options outstanding to senior
management, other employees, consultants and directors totaled 1,530,650 at an
exercise price of $10.00 per share. In addition to Stock Options outstanding
under the 1996 Plan, 130,000 Stock Options granted to Douglas J. Stanard on May
1,
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1996 were outstanding at March 31, 1998. Of the total Stock Options awarded
under the 1996 Plan, 265,966 were exercisable at March 31, 1998 and 17,250 were
exercised in the three months ended March 31, 1998. Forfeited Stock Options
under the 1996 Plan totaled 273,100 through March 31, 1998. There were 219,251
shares of Common Stock available for grant under the 1996 Plan as of March 31,
1998.
AMF Bowling, Inc. 1998 Stock Incentive Plan
Subject to shareholder approval, AMF Bowling's Board of Directors has
approved the AMF Bowling, Inc. 1998 Stock Incentive Plan (the "1998 Plan") under
which AMF Bowling may grant incentive awards in the form of Restricted Stock
Awards, Stock Options and Stock Appreciation Rights in substantially the same
manner as provided under the 1996 Plan. Two million shares have been reserved
and will be available for issuance under the 1998 Plan. In addition, shares of
Common Stock that have been reserved but not issued under the 1996 Plan, and
shares which are subject to awards under the 1996 Plan that expire or otherwise
terminate, may be granted as awards pursuant to the 1998 Plan. As of March 31,
1998, no awards were granted under the 1998 Plan.
Note 8. Acquisitions
Since the Acquisition and prior to December 31, 1997, Bowling Centers
purchased an aggregate of 179 bowling centers from unrelated sellers. The
combined purchase price, net of cash acquired, was approximately $340.7 million
(including amounts paid in 1998 for certain bowling centers included in the 1997
total), and was funded with approximately $40.0 million from the sale of equity
by AMF Bowling to its institutional stockholders and one of its directors, and
with $300.7 million from available borrowing under Bowling Worldwide's
acquisition facility then existing under the bank credit agreement and under the
Bank Facility.
From January 1, 1998 through March 31, 1998, the Company acquired 29
centers in the United States, two centers in the United Kingdom and two centers
in Australia from unrelated sellers, including fifteen centers from Active West,
Inc. ("Active West"). The aggregate purchase price was approximately $48.5
million, including $28.0 million funded with borrowings under the Bank Facility
and, with respect to the Active West acquisition, the issuance of 50,000 shares
of Common Stock.
Between March 31, 1998 and April 30, 1998, the Company acquired one bowling
center in the United States, eleven centers in the United Kingdom and one center
in Australia from unrelated sellers. As a result of these acquisitions, and
after giving effect to the closing of eight U.S. centers and one international
center in 1997, the Company owned or operated 400 U.S. bowling centers and 116
international bowling centers as of April 30, 1998.
As of April 30, 1998, the Company had entered into purchase agreements
regarding the acquisitions of twelve additional U.S. bowling centers from
unrelated sellers. The aggregate purchase price is expected to be approximately
$15.1 million and is expected to be funded with available borrowing under the
Bank Facility and cash generated from operations.
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 9. Business Segments
The Company operates in two major lines of business: operating bowling
centers and manufacturing of bowling and related products. Information
concerning operations in these businesses for the three months ended March 31,
1998 and 1997, respectively, is presented below (in millions):
Three Months Ended March 31, 1998
--------------------------------------------------------------------------------
Bowling Centers Bowling Products
----------------------- -----------------------
Inter- Sub- Inter- Sub- Elim-
U.S. national total U.S. national total Corporate inations Total
---- -------- ----- ---- -------- ----- --------- -------- -----
Revenue from unaffiliated customers $ 125.3 $ 25.2 $ 150.5 $ 13.6 $ 23.5 $ 37.1 $ - $ - $ 187.6
Intersegment sales - - - 3.7 0.3 4.0 - - 4.0
Operating income (loss) 32.6 2.3 34.9 (3.9) (1.4) (5.3) (4.0) 0.7 26.3
Identifiable assets 865.4 312.4 1,177.8 631.3 75.1 706.4 3.9 1.9 1,890.0
Depreciation and amortization 17.4 4.5 21.9 5.1 0.3 5.4 0.2 (0.7) 26.8
Capital expenditures 7.0 0.9 7.9 3.2 0.5 3.7 - - 11.6
Research and development expense - - - 0.2 - 0.2 - - 0.2
Three Months Ended March 31, 1997
--------------------------------------------------------------------------------
Bowling Centers Bowling Products
----------------------- -----------------------
Inter- Sub- Inter- Sub- Elim-
U.S. national total U.S. national total Corporate inations Total
---- -------- ----- ---- -------- ----- --------- -------- -----
Revenue from unaffiliated customers $ 82.6 $ 25.9 $ 108.5 $ 23.5 $ 25.6 $ 49.1 $ - $ - $ 157.6
Intersegment sales - - - 2.0 0.9 2.9 - - 2.9
Operating income (loss) 23.0 2.8 25.8 6.7 0.5 7.2 (3.6) 0.3 29.7
Depreciation and amortization 11.6 4.5 16.1 4.5 0.3 4.8 - (0.4) 20.5
Capital expenditures 4.0 1.5 5.5 0.9 0.2 1.1 0.4 (0.1) 6.9
Research and development expense - - - 0.2 - 0.2 - - 0.2
Note 10. Subsequent Event
On May 12, 1998, AMF Bowling issued its zero coupon convertible debentures
(the "Debentures") for gross proceeds of approximately $284.1 million. The
Debentures, which were sold in a private placement to qualified institutional
buyers, mature on May 12, 2018 and have a yield to maturity of 7% per annum. The
Debentures were issued pursuant to an Indenture (the "Indenture") dated as of
May 12, 1998 between AMF Bowling and The Bank of New York, as Trustee, at an
original price of $252.57 per $1,000 principal amount at maturity. The
Debentures are convertible at any time prior to maturity into shares of Common
Stock at a conversion rate of 8.6734 shares per $1,000 principal amount at
maturity. If held to maturity and not redeemed or repurchased by AMF Bowling,
the Debentures will accrue to an aggregate principal amount at maturity of
$1.125 billion. The Debentures are not entitled to a sinking fund.
The Debentures are not redeemable at the option of AMF Bowling before May
12, 2003. Thereafter, the Debentures are redeemable for cash at the option of
AMF Bowling at redemption prices specified in the Debentures, the form of which
is attached as an annex to the Indenture.
The Debentures will be purchased by AMF Bowling, at the option of holders
of the Debentures, as of May 12, 2003, May 12, 2008 and May 12, 2013 for
purchase prices specified in the Debentures. The Debentures may also be redeemed
at the option of the holders of the Debentures upon the occurrence of a Change
of Control (as defined in the Indenture) at redemption prices specified in the
Debentures. AMF Bowling may elect to pay any such purchase price or redemption
price in cash or Common Stock, or any combination thereof.
AMF Bowling has reserved 9,757,575 shares of Common Stock for issuance
upon conversion, redemption or repurchase of the Debentures.
In connection with the issuance of the Debentures, AMF Bowling has
agreed pursuant to a registration rights agreement (the "Registration Rights
Agreement") to file with the Securities and Exchange Commission a shelf
registration statement in respect of the Debentures and the Common Stock
issuable on conversion, redemption or repurchase thereof. If the shelf
registration statement has not been filed within 90 days or declared effective
within 180 days, after May 12, 1998, AMF Bowling must pay liquidated damages as
specified in the Registration Rights Agreement. AMF Bowling has agreed to keep
the shelf registration statement effective until the earlier of (i) the sale
pursuant to the shelf registration statement of all the securities registered
thereunder and (ii) the expiration of the holding period applicable to
non-affiliates of AMF Bowling under Rule 144(k) of the Securities Act of 1933
(which is currently two years).
The net proceeds of the offering were approximately $275.6 million and were
contributed by AMF Bowling as equity to Bowling Worldwide and used to repay
senior bank indebtedness under the Credit Agreement. The senior bank
indebtedness repaid remains available for reborrowing, and such repayment and
resulting ability to reborrow will enable the Company to incur additional
indebtedness under the Credit Agreement to fund the Company's ongoing bowling
center acquisition program and for other corporate purposes.
The foregoing descriptions of the Debentures, the Indenture and the
Registration Rights Agreement are not complete and references are made to the
Indenture (including the form of Debenture attached as an annex thereto) and the
Registration Rights Agreement, filed as Exhibits 4.1 and 10.1, respectively, to
this Form 10-Q for a more complete description of their terms.
Note 11. Condensed Consolidating Financial Statements
The following condensed consolidating financial information presents: (i)
the condensed consolidating balance sheet as of March 31, 1998, and condensed
consolidating statements of income and cash flows for the three months ended
March 31, 1998 and (ii) elimination entries necessary to combine the entities
comprising the Company.
Bowling Worldwide's senior subordinated notes and senior subordinated
discount notes are jointly and severally guaranteed on a full and unconditional
basis by AMF Group Holdings and the first and second-tier subsidiaries of
Bowling Worldwide. AMF Bowling and the third-tier subsidiaries of Bowling
Worldwide have not provided guarantees of such indebtedness.
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
As of March 31, 1998
(unaudited)
(in thousands)
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
----------------- -------------- ---------------- ----------------
Assets
Current assets:
Cash and cash equivalents $ 27,222 $ 2,371 $ - $ 29,593
Accounts and notes receivable, net
of allowance for doubtful accounts 64,146 2,987 - 67,133
Accounts receivable - intercompany 7,917 1,962 (9,879) -
Inventories 65,739 1,705 - 67,444
Deferred taxes and other assets 16,684 1,943 - 18,627
----------------- -------------- ---------------- ----------------
Total current assets 181,708 10,968 (9,879) 182,797
Notes receivable - intercompany 16,660 1,663 (18,323) -
Property and equipment, net 761,695 41,970 1,091 804,756
Investment in subsidiaries 24,717 630,254 (654,971) -
Goodwill and other assets 895,632 6,766 - 902,398
----------------- -------------- ---------------- ----------------
Total assets $ 1,880,412 $ 691,621 $ (682,082) $ 1,889,951
================= ============== ================ ================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 30,207 $ 2,693 $ - $ 32,900
Accounts payable - intercompany 2,000 7,879 (9,879) -
Accrued expenses 56,706 5,097 - 61,803
Income taxes payable 503 4,206 - 4,709
Long-term debt, current portion 29,251 - - 29,251
----------------- -------------- ---------------- ----------------
Total current liabilities 118,667 19,875 (9,879) 128,663
Long-term debt 1,099,921 - - 1,099,921
Notes payable - intercompany 1,663 16,660 (18,323) -
Other long-term liabilities 5,190 - - 5,190
Deferred income taxes - - - -
----------------- -------------- ---------------- ----------------
Total liabilities 1,225,441 36,535 (28,202) 1,233,774
----------------- -------------- ---------------- ----------------
Commitments and contingencies
Stockholders' equity:
Common stock - 597 - 597
Paid-in capital 748,526 747,429 (746,522) 749,433
Retained earnings (deficit) (75,381) (74,766) 74,468 (75,679)
Equity adjustment from foreign
currency translation (18,174) (18,174) 18,174 (18,174)
----------------- -------------- ---------------- ----------------
Total stockholders' equity 654,971 655,086 (653,880) 656,177
----------------- -------------- ---------------- ----------------
Total liabilities and stockholders' equity $ 1,880,412 $ 691,621 $ (682,082) $ 1,889,951
================= ============== ================ ================
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF INCOME
For the Three Months Ended March 31, 1998
(unaudited)
(in thousands)
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
------------- ------------ ------------ -------------
Operating revenue $ 174,939 $ 12,625 $ - $ 187,564
------------- ------------ ------------ -------------
Operating expenses:
Cost of goods sold 36,417 2,440 - 38,857
Bowling center operating expenses 72,849 5,864 - 78,713
Selling, general, and administrative expenses 16,045 894 - 16,939
Depreciation and amortization 25,249 1,624 (83) 26,790
------------- ------------ ------------ -------------
Total operating expenses 150,560 10,822 (83) 161,299
------------- ------------ ------------ -------------
Operating income 24,379 1,803 83 26,265
------------- ------------ ------------ -------------
Nonoperating expenses (income):
Interest expense 25,974 - - 25,974
Other expenses, net (221) 794 - 573
Interest income (459) (74) - (533)
Equity in (income) loss of subsidiaries (69) 732 (663) -
------------- ------------ ------------ -------------
Total nonoperating expenses 25,225 1,452 (663) 26,014
------------- ------------ ------------ -------------
Income (loss) before income taxes (846) 351 746 251
Provision (benefit) for income taxes (535) 1,065 - 530
------------- ------------ ------------ -------------
Net income (loss) before equity in loss of
joint ventures (311) (714) 746 (279)
Equity in loss of joint ventures (352) - - (352)
------------- ------------ ------------ -------------
Net loss $ (663) $ (714) $ 746 $ (631)
============= ============ ============ =============
AMF BOWLING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
AMF BOWLING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 1998
(unaudited)
(in thousands)
Non-
Guarantor Guarantor
Companies Companies Eliminations Consolidated
-------------- ------------- --------------- -----------------
Cash flows from operating activities:
Net loss $ (663) $ (714) $ 746 $ (631)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 25,249 1,624 (83) 26,790
Equity in loss of joint ventures 352 - - 352
Deferred income taxes - - - -
Amortization of bond discount 5,667 - - 5,667
Equity in earnings of subsidiaries (69) 732 (663) -
Loss on the sale of property and equipment, net 269 - - 269
Changes in assets and liabilities:
Accounts and notes receivable 7,522 (235) - 7,287
Receivables and payables - affiliates (2,406) 2,406 - -
Inventories (10,203) 126 - (10,077)
Other assets (2,063) 16 - (2,047)
Accounts payable and accrued expenses (16,130) 328 - (15,802)
Income taxes payable (1,532) 859 - (673)
Other long-term liabilities (40) - - (40)
-------------- ------------- --------------- -----------------
Net cash provided by operating activities 5,953 5,142 - 11,095
-------------- ------------- --------------- -----------------
Cash flows from investing activities:
Acquisitions of operating units, net of cash acquired (60,792) (4,823) - (65,615)
Investments in and advances to joint ventures (4,565) - - (4,565)
Purchases of property and equipment (11,075) (566) - (11,641)
Proceeds from sale of property and equipment 104 - - 104
-------------- ------------- --------------- -----------------
Net cash used in investing activities (76,328) (5,389) - (81,717)
-------------- ------------- --------------- -----------------
Cash flows from financing activities:
Proceeds from long-term debt, net of deferred financing costs 72,000 - 72,000
Payments on long-term debt (9,093) - - (9,093)
Issuance of shares 1,381 - - 1,381
Noncompete obligations (258) - - (258)
-------------- ------------- --------------- -----------------
Net cash provided by financing activities 64,030 - - 64,030
-------------- ------------- --------------- -----------------
Effect of exchange rates on cash 110 285 - 395
-------------- ------------- --------------- -----------------
Net decrease in cash (6,235) 38 - (6,197)
Cash and cash equivalents at beginning of period 33,457 2,333 - 35,790
-------------- ------------- --------------- -----------------
Cash and cash equivalents at end of period $ 27,222 $ 2,371 $ - $ 29,593
============== ============= =============== =================
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Information in this report contains forward-looking statements, which are
statements other than historical information or statements of current condition.
Some forward-looking statements may be identified by use of terms such as
"believes", "anticipates", "intends", or "expects". These forward-looking
statements relate to the plans and objectives of AMF Bowling, Inc. ("AMF
Bowling") and its subsidiaries (collectively, the "Company") for future
operations. In light of the risks and uncertainties inherent in all future
projections, the inclusion of forward-looking statements in this report should
not be regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved. Many factors could cause
the Company's actual results to differ materially from those in the
forward-looking statements, including, among other things: (i) the Company's
ability to execute successfully acquisition opportunities and to integrate
acquired operations into its business, (ii) the continued development and growth
of new bowling markets and the Company's ability to continue to identify those
markets and to generate sales of products in those markets, (iii) the risk of
adverse political acts or developments in the Company's existing or proposed
markets for its products or in which it operates its bowling centers, (iv) the
Company's ability to retain experienced senior management, (v) the ability of
AMF Bowling and its subsidiaries to generate sufficient cash flow in a timely
manner to satisfy principal and interest payments on their indebtedness, (vi)
the popularity of bowling as an activity in the United States and abroad and
(vii) the continuation or worsening of economic difficulties currently being
experienced by certain countries in the Asia Pacific region. In addition, actual
results may differ materially from forward-looking statements in this report as
a result of factors generally applicable to companies in similar businesses,
including, among other things: (i) a decline in general economic conditions,
(ii) an adverse judgment in pending or future litigation and (iii) increased
competitive pressure from current competitors and future market entrants. The
foregoing review of important factors should not be construed as exhaustive and
should be read in conjunction with other cautionary statements that are included
elsewhere in this report. AMF Bowling undertakes no obligation to release
publicly the results of any future revisions it may make to forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Background
This discussion should be read in conjunction with the information
contained under "Selected Financial Data" and AMF Bowling's Consolidated
Financial Statements (unaudited) included elsewhere herein.
The financial information presented below includes the Company's operating
results expressed in terms of EBITDA, which represents earnings before net
interest expense, income taxes, depreciation and amortization, and other net
income or net expenses. EBITDA information is included because the Company
understands that such information is used by certain investors as one measure of
an issuer's historical ability to service debt. EBITDA is not intended to
represent and should not be considered more meaningful than, or an alternative
to, other measures of performance determined in accordance with U.S. generally
accepted accounting principles.
General
The Company is principally engaged in two business segments: (i) the
ownership or operation of 399 U.S. bowling centers and 104 international bowling
centers ("Bowling Centers"), including fourteen joint ventures operated with
third parties, as of March 31, 1998; and (ii) the manufacture and sale of
bowling equipment such as automatic pinspotters, automatic scoring equipment,
bowling pins, lanes, ball returns, certain spare parts, and the resale of allied
products such as bowling balls, bags, shoes, and certain other spare parts
("Bowling Products").
To facilitate a meaningful comparison, in addition to discussing the
consolidated results of the Company, certain portions of this Management's
Discussion and Analysis of Financial Condition and Results of Operations
discusses results of Bowling Centers and Bowling Products separately.
The results of Bowling Centers, Bowling Products and the consolidated group
are set forth below. The business segment results presented below are before
intersegment eliminations since the Company's management believes that this will
provide a more accurate comparison of performance by segment from year to year.
The intersegment eliminations are not material. Interest expense is presented on
a gross basis. The results of Bowling Centers for the first quarter of 1998
reflect the inclusion of 140 centers acquired and one new center constructed
since April 1, 1997.
Acquisitions
The Company has continued, and expects to continue, its aggressive bowling
center acquisition program. The Company is engaged in ongoing evaluations of and
discussions with third parties regarding possible bowling center acquisitions.
Management's plans to expand the bowling center operations are subject to, among
other things, the availability of funds and the continuation of favorable
economic and financial conditions, which are generally not within the Company's
control.
From January 1, 1998 through March 31, 1998, the Company acquired 29
bowling centers in the United States, two centers in the United Kingdom and two
centers in Australia from unrelated sellers. Between March 31, 1998 and April
30, 1998, the Company acquired one bowling center in the United States, eleven
centers in the United Kingdom and one center in Australia from unrelated
sellers. See "Note 8. Acquisitions" in the Notes to Condensed Consolidated
Financial Statements for a discussion of these transactions.
AMF BOWLING, INC.
Selected Financial Data
(unaudited)
(in millions of dollars)
Three Months
Ended March 31,
-------------------
1998 1997
------- -------
Bowling Centers (before intersegment eliminations)
Operating revenue $ 150.5 $ 108.5
------- -------
Cost of goods sold 13.4 9.4
Bowling center operating expenses 78.8 55.6
Selling, general, and administrative expenses 1.5 1.6
Depreciation and amortization 21.9 16.1
------- -------
Operating income $ 34.9 $ 25.8
Bowling Products (before intersegment eliminations)
Operating revenue $ 41.1 $ 52.0
Cost of goods sold 29.3 31.2
------- -------
Gross profit 11.8 20.8
Selling, general, and administrative expenses 11.7 8.8
Depreciation and amortization 5.4 4.8
------- -------
Operating income (loss) $ (5.3) $ 7.2
======= =======
Consolidated
Operating revenue $ 187.6 $ 157.6
------- -------
Cost of goods sold 38.9 38.1
Bowling center operating expenses 78.7 55.3
Selling, general, and administrative expenses 16.9 14.0
Depreciation and amortization 26.8 20.5
------- -------
Operating income 26.3 29.7
Interest expense, gross 26.0 27.7
Other expense, net 0.1 0.8
------- -------
Income before income taxes 0.2 1.2
Provision for income taxes 0.5 1.1
------- -------
Net income (loss) before equity in loss of joint ventures (0.3) 0.1
Equity in loss of joint ventures (0.3) -
------- -------
Net income (loss) $ (0.6) $ 0.1
======= =======
Selected Data:
EBITDA
Bowling Centers $ 56.8 $ 41.9
Bowling Products $ 0.1 $ 12.0
EBITDA margin
Bowling Centers 37.7% 38.6%
Bowling Products 0.2% 23.1%
Bowling Centers
The Bowling Centers results shown in "Selected Financial Data" reflect both
U.S. and international Bowling Centers operations. Bowling Centers derives its
revenue and profits from three principal sources: (i) bowling, (ii) food and
beverage and (iii) other sources, such as shoe rental, amusement games,
billiards and pro shops. For the three months ended March 31, 1998, bowling,
food and beverage and other revenue represented 60.7%, 26.8% and 12.5% of total
Bowling Centers revenue, respectively. For the three months ended March 31,
1997, bowling, food and beverage and other revenue represented 62.2%, 24.9% and
12.9% of total Bowling Centers revenue, respectively.
First Quarter of 1998 Compared to First Quarter of 1997
Bowling Centers operating revenue increased $42.0 million, or 38.7%. An
increase of $47.1 million is attributable to 155 new centers which were acquired
and one new center which was constructed after December 31, 1996, of which $45.2
million is from U.S. centers, while $1.9 million is from international centers.
Of these new centers, 140 centers were acquired and one center was constructed
since April 1, 1997. Constant centers (centers in operation for at least one
full fiscal year) operating revenue decreased $3.7 million, or 3.6%. U.S.
constant centers revenue decreased $1.9 million primarily as a result of lower
lineage (games per lane per day) caused by mild weather and aggressive
acquisition activity. International constant centers operating revenue decreased
$1.8 million primarily due to unfavorable exchange rate fluctuations in
Australia, Japan, Mexico and France. On a constant exchange rate basis,
international operating revenue would have increased $0.1 million in the first
quarter of 1998 compared to first quarter of 1997. Most countries' results
exceeded those of the prior year except Japan and Hong Kong which were affected
by weak economies. A decrease of $1.4 million was attributable to seven centers
which were closed since March 31, 1997.
Cost of goods sold increased $4.0 million, or 42.6%, primarily as a result
of the net increase in the number of centers.
Operating expenses increased $23.2 million, or 41.7%. An increase of $22.4
million was attributable to the net increase in the number of centers and an
increase of $0.8 million was primarily attributable to increased regional
staffing costs and increased advertising spending aimed at promoting the AMF
national brand. As a percentage of its revenue, Bowling Centers operating
expenses were 51.2% for the first quarter of 1997 compared to 52.4% for the
first quarter of 1998.
Selling, general and administrative expenses decreased $0.1 million, or
6.3%, primarily due to exchange rate fluctuations.
EBITDA increased $14.9 million, or 35.5%, primarily as a result of the net
increase in the number of centers. Additionally, Bowling Centers EBITDA was
impacted by increased staffing and advertising spending and, internationally, by
the exchange rates as discussed above. EBITDA margin for the first quarter of
1998 was 37.7% compared to 38.6% in the first quarter of 1997.
Bowling Products
First Quarter of 1998 Compared to First Quarter of 1997
Bowling Products operating revenue decreased $10.9 million, or 21.0%. New
Center Package (defined as all the equipment necessary to outfit one bowling
lane) ("NCP" or "NCPs") revenue decreased $6.1 million, or 25.6%, and
Modernization and Consumer Products revenue decreased $4.8 million, or 17.1%.
Operating results have been adversely impacted by current economic difficulties
in certain markets of the Asia Pacific region which have reduced the order rate,
level of shipments and backlog for NCPs and Modernization and Consumer Products
sales. During the first quarter of 1998, Bowling Products recorded NCP shipments
of 504 units compared to shipments of 897 units for the first quarter of 1997
and 1,013 units for the fourth quarter of 1997. The decrease in Modernization
and Consumer Products revenue is primarily due to decreased sales to Asia
Pacific distributors and U.S. customers.
Gross profit decreased $9.0 million, primarily as a result of the decreased
levels of shipments, lower prices attributable to the strong U.S. dollar which
resulted in competitive pricing pressure and Bowling Products' unabsorbed
manufacturing overhead.
Bowling Products selling, general and administrative expenses increased
$2.9 million, or 33.0%, as a result of increases of $1.0 million in advertising
expenses and $1.9 million related to staffing. Of the increase in staffing, $0.5
million was attributable to reclassification of expenses from Bowling Products
cost of goods sold, $0.3 million was attributable to reclassification of
expenses from Bowling Centers operating expenses and Corporate selling, general
and administrative expenses, $0.5 million was attributable to increased staffing
expenses primarily in the international sales offices, $0.4 million related to
increased sales commissions, and $0.2 million related to the establishment of a
regional office in Europe.
Bowling Products EBITDA decreased $11.9 million, or 99.2%, and the Bowling
Products EBITDA margin decreased from 23.1% in the first quarter of 1997 to 0.2%
in the first quarter of 1998 as a result of the lower gross profit and increased
selling, general and administrative expense discussed above.
Consolidated
Depreciation and Amortization
Depreciation and amortization increased $6.3 million or 30.7% in the first
quarter of 1998 compared to 1997. The increase is primarily attributable due to
depreciation of property and equipment of centers acquired since March 31, 1997.
Incremental depreciation expense was also incurred as a result of capital
expenditures.
Interest Expense
Gross interest expense decreased $1.7 million, or 6.1%, in the first
quarter of 1998 compared to 1997. Interest savings associated with the reduction
of bank debt and redemption of a portion of Bowling Worldwide's senior
subordinated discount notes with proceeds of AMF Bowling's initial public
offering (the "Initial Public Offering") were partially offset by interest
incurred on increased levels of bank debt as a result of center acquisitions.
See "Liquidity and Capital Resources" for further discussion of bank debt.
Non-cash bond interest amortization totaled $5.7 million and $8.3 million for
the three months ended March 31, 1998 and 1997, respectively.
Net Loss
Net loss in the first quarter of 1998 was $0.6 million compared to net
income of $0.1 million in the first quarter of 1997. The decrease of $0.7
million was primarily a result of decreases in Bowling Products revenue and
EBITDA discussed above and the increase in depreciation expense. Other expense
decreased $0.7 million, or 87.5%, primarily as a result of foreign currency
transaction gains experienced in the first quarter of 1998 compared to losses
experienced in the first quarter of 1997. The provision for income taxes
decreased $0.6 million in the first quarter of 1998 compared to the same period
in 1997. The Company recorded $0.3 million in equity in loss of joint ventures
in the first quarter of 1998.
Income Taxes
Prior to the Acquisition, certain of the companies within the Predecessor
Company elected S corporation status under the Internal Revenue Code of 1986, as
amended (the "Code"). Upon consummation of the Acquisition, those companies
became taxable corporations under the Code.
In connection with the Acquisition, the two principal subsidiaries of the
Company elected under Section 338 (h) (10) of the Code to treat the stock
purchase in the Acquisition as a deemed asset acquisition for the purposes of
U.S. federal income taxes. These elections permitted both of the
affiliated companies to revalue their assets to fair market value and to treat
any amortizable goodwill as tax deductible over fifteen years.
As of December 31, 1997, the Company had net operating losses of
approximately $110.0 million and foreign tax credits of $12.4 million which will
carry over to future years to offset U.S. taxes. The foreign tax credits will
begin to expire in the year 2001 and the net operating losses will begin to
expire in the year 2011. The Company had not recorded a valuation reserve as of
December 31, 1997 because the Company expects to utilize these net operating
losses and foreign tax credits prior to their expirations.
Liquidity
The Company's primary source of liquidity is cash provided by operations
and credit facilities as described below. Working capital on December 31, 1997
was $43.9 million compared to $54.1 million as of March 31, 1998, an increase of
$10.2 million. Increases in working capital were primarily attributable to an
increase of $10.9 million in inventory balances primarily due to new product
introductions, a decrease of $8.7 million in accounts payable and a net increase
of $3.7 million in other current assets and liabilities. These increases were
offset by a decrease of $6.2 million in cash primarily due to interest and
principal payments on debt outstanding under the Credit Agreement and internal
funding of bowling center acquisitions and a decrease of $6.9 million in
accounts receivable as a result of increased collection efforts implemented in
the first quarter of 1998.
Net cash flows provided by operating activities were $23.6 million for the
three months ended March 31, 1997 compared to $11.1 million for the three months
ended March 31, 1998, a decrease of $12.5 million. A decrease of $27.9 million
was caused by decreased levels of accounts payable and accrued expenses, a
decrease of $2.6 million was attributable to lower levels of bond amortization
resulting from the redemption of a portion of Bowling Worldwide's senior
subordinated discount notes in connection with the Initial Public Offering and a
decrease of $0.7 million was attributable to the net loss of $0.6 million
recorded in the first quarter of 1998 compared to net income of $0.1 million in
the same period in 1997. These decreases were offset by an increase of $11.4
attributable to lower levels of accounts receivable, an increase of $6.3 million
in depreciation and amortization and a net increase of $1.0 million attributable
to changes in other operating activities.
Net cash flows used in investing activities were $40.3 million for the
three months ended March 31, 1997 compared to net cash flows used of $81.7
million for the three months ended March 31, 1998. Bowling Center acquisition
spending and purchases of property and equipment increased by $32.0 million and
$4.7 million, respectively, in the first quarter of 1998 compared to the same
period in 1997. In the first quarter of 1998, 33 centers were purchased compared
to 15 centers in the same period in 1997. Investments in and advances to joint
ventures totaled $4.6 million in the first quarter of 1998 compared to no
investments in or advances to joint ventures in the first quarter of 1997. Other
cash flows provided from investing activities decreased $0.1 million. See "Note
8. Acquisitions" and "Capital Expenditures" for additional discussion of these
investing activities.
Net cash provided by financing activities was $28.3 million for the three
months ended March 31, 1997 compared to net cash provided of $64.0 million for
the three months ended March 31, 1998, an increase of $35.7 million. Borrowings
under the Credit Agreement increased $43.0 million primarily as a result of the
increase in the number of centers acquired in the first quarter of 1998 compared
to the same period in 1997. Payments on long-term debt were higher by $9.1
million in 1998 compared to 1997 because the 1997 first quarter payment actually
occurred in the second quarter of 1997. In the first quarter of 1998, $1.4
million of common stock was issued. Of this amount, $1.2 was attributable to the
Active West acquisition and $0.2 million related to employee stock option
exercises. Net cash flows provided by other financing activities increased $0.4
million. See "Note 5. Long-Term Debt", "Note 7. Employee Benefit Plans", and
"Note 8. Acquisitions" in the Notes to Condensed Consolidated Financial
Statements.
As a result of the aforementioned, cash increased by $9.5 million for the
three months ended March 31, 1997 compared to a decrease of $6.2 million for the
three months ended March 31, 1998.
For a description of the recent offering by AMF Bowling of its zero coupon
convertible debentures, see "Note 10. Subsequent Event" in the Notes to
Condensed Consolidated Financial Statements and "-Capital Resources" below.
Capital Resources
The Company's total indebtedness increased substantially as a result of the
Acquisition and the Company's ongoing bowling center acquisition program. At
March 31, 1998, the Company's debt structure consisted of $684.3 million of
Senior Debt, $250.0 million of senior subordinated notes and $194.9 million of
senior subordinated discount notes. The Company's Senior Debt consisted of
$437.2 million outstanding under the Term Facilities, $245.1 million outstanding
under the Bank Facility and $2.0 million represented by one mortgage note. At
March 31, 1998, the Company was also capitalized with equity of $656.2 million.
The Company has the ability to borrow for general corporate purposes and
for acquisitions pursuant to the $355.0 million Bank Facility, subject to
certain conditions. At March 31, 1998, $109.9 million was available for
borrowing under the Bank Facility. Between March 31, 1998 and April 30, 1998,
additional borrowings under the Bank facility totaled $35.0 million and were
used to fund the acquisitions of bowling centers described above and for general
corporate purposes. At April 30, 1998, $280.1 million was outstanding under the
Bank Facility.
On May 12, 1998, AMF Bowling issued its zero coupon convertible debentures
(the "Debentures") for gross proceeds of approximately $284.1 million. The
Debentures, which were sold in a private placement to qualified institutional
buyers, mature on May 12, 2018 and have a yield to maturity of 7% per annum. The
Debentures were issued pursuant to an Indenture (the "Indenture") dated as of
May 12, 1998 between AMF Bowling and The Bank of New York, as Trustee, at an
original price of $252.57 per $1,000 principal amount at maturity. The
Debentures are convertible at any time prior to maturity into shares of Common
Stock at a conversion rate of 8.6734 shares per $1,000 principal amount at
maturity. If held to maturity and not redeemed or repurchased by AMF Bowling,
the Debentures will accrue to an aggregate principal amount at maturity of
$1.125 billion. The Debentures are not entitled to a sinking fund.
The Debentures are not redeemable at the option of AMF Bowling before May
12, 2003. Thereafter, the Debentures are redeemable for cash at the option of
AMF Bowling at redemption prices specified in the Debentures, the form of which
is attached as an annex to the Indenture.
The Debentures will be purchased by AMF Bowling, at the option of holders
of the Debentures, as of May 12, 2003, May 12, 2008 and May 12, 2013 for
purchase prices specified in the Debentures. The Debentures may also be redeemed
at the option of the holders of the Debentures upon the occurrence of a Change
of Control (as defined in the Indenture) at redemption prices specified in the
Debentures. AMF Bowling may elect to pay any such purchase price or redemption
price in cash or Common Stock, or any combination thereof.
AMF Bowling has reserved 9,757,575 shares of Common Stock for issuance
upon conversion, redemption or repurchase of the Debentures.
In connection with the issuance of the Debentures, AMF Bowling has
agreed pursuant to a registration rights agreement (the "Registration Rights
Agreement") to file with the Securities and Exchange Commission a shelf
registration statement in respect of the Debentures and the Common Stock
issuable on conversion, redemption or repurchase thereof . If the shelf
registration statement has not been filed within 90 days, or declared effective
within 180 days, after May 12, 1998, AMF Bowling must pay liquidated damages as
specified in the Registration Rights Agreement. AMF Bowling has agreed to keep
the shelf registration statement effective until the earlier of (i) the sale
pursuant to the shelf registration statement of all the securities registered
thereunder and (ii) the expiration of the holding period applicable to
non-affiliates of AMF Bowling under Rule 144(k) of the Securities Act of 1933
(which is currently two years).
The net proceeds of the offering were approximately $275.6 million and were
contributed by AMF Bowling as equity to Bowling Worldwide and used to repay
senior bank indebtedness under the Credit Agreement. The senior bank
indebtedness repaid remains available for reborrowing, and such repayment and
resulting ability to reborrow will enable the Company to incur additional
indebtedness under the Credit Agreement to fund the Company's ongoing bowling
center acquisition program and for other corporate purposes.
The foregoing descriptions of the Debentures, the Indenture and the
Registration Rights Agreement are not complete and references are made to the
Indenture (including the form of Debenture attached as an annex thereto) and the
Registration Rights Agreement, filed as Exhibits 4.1 and 10.1, respectively, to
this Form 10-Q for a more complete description of their terms.
The Company has funded its cash needs through the Bank Facility as well as
cash flow from operations. A substantial portion of the Company's available cash
will be applied to service outstanding indebtedness. For the quarter ended March
31, 1998, the Company incurred cash interest expense of $19.9 million,
representing 37.5% of EBITDA for the quarter. For the quarter ended March 31,
1997, the Company incurred cash interest expense of $18.9 million, representing
37.6% of EBITDA for the quarter.
The indentures governing the senior subordinated notes and the senior
subordinated discount notes and the provisions of the Credit Agreement contain
financial and operating covenants and significant restrictions on the ability of
the Company to pay dividends, incur indebtedness, make investments and take
certain other corporate actions.
The Company's ability to make scheduled payments of principal of, or to pay
interest on, or to refinance its indebtedness depends on its future performance,
which, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors beyond its control,
including the conditions of the debt and equity markets. Based upon the current
level of operations, management believes that available cash flow, together with
available borrowings under the Credit Agreement and other sources of liquidity,
will be adequate to meet the Company's requirements for working capital, capital
expenditures, scheduled payments of principal of, and interest on, its Senior
Debt, and interest on the senior subordinated notes and senior subordinated
discount notes. There can be no assurance, however, that the Company's business
will generate sufficient cash flow from operations or that future borrowings
will be available in an amount sufficient to enable the Company to service its
indebtedness, make necessary capital expenditures, or that any refinancing would
be available on commercially reasonable terms or at all.
Capital Expenditures
For the three months ended March 31, 1998, the Company's capital
expenditures were $11.6 million compared to $6.9 million for the three months
ended March 31, 1997, an increase of $4.7 million. Bowling Centers maintenance
expenditures increased $2.2 million attributable to the higher number of centers
as a result of the Company's acquisition program, Bowling Products expenditures
increased $1.9 million as a result of expenditures on production equipment for
certain new products, and expenditures on company-wide information systems
increased $1.3 million. These increases were offset by a net decrease of $0.7
million in other expenditure categories.
The Company funds its capital expenditures from cash generated by
operations and, with respect to the construction and acquisition of new centers,
internally generated cash, the Bank Facility and issuances of common equity. The
Company's management believes that after the issuance of the Debentures, the
amount available under the Bank facility will be adequate to fund the Company's
ongoing acquisition program at its current rate for approximately 12 months. See
"Note 8. Acquisitions" in the Notes to Condensed Consolidated Financial
Statements, "--Liquidity" and "--Capital Resources" for discussions of funding
of acquisitions of new bowling centers and a description of the Debentures.
Seasonality and Cyclicality
On a consolidated basis, revenue and EBITDA of the Company's businesses are
neither highly seasonal nor highly cyclical. The geographic diversity of the
Company's Bowling Centers, which operate
across different regions of the U.S. and across eleven other countries, has
provided stability to the Company's annual cash flows. Although financial
performance of Bowling Centers operations is seasonal in nature in many
countries, with cash flows typically peaking in the winter months and reaching
their lows in the summer months, the geographic diversity of the Company's
bowling centers has helped reduce this seasonality as bowling centers in certain
countries in which the Company operates exhibit different seasonal sales
patterns. As a result of the growing number of U.S. centers attributable to the
Company's acquisition program, however, the seasonality described above may be
accentuated. In Australia, where the Company has its largest number of
international centers, the reversal of seasons relative to the U.S. helps
mitigate the seasonality in worldwide operations. The Company's cash flows are
further stabilized by the location of many centers in regions where the climates
have high average temperatures and high humidity. In the U.S., during the summer
months when league bowling is generally less active, bowling centers in the
southern U.S. continue to show strong performance. Similarly, in regions with
warm summer climates such as Hong Kong and Mexico, where bowling in
air-conditioned centers may be more attractive than outdoor activities, bowling
centers show strong performance. See "Note 9. Business Segments" in the Notes to
Condensed Consolidated Financial Statements.
Modernization and Consumer Products sales display seasonality. The U.S.
market, which is the largest market for Modernization and Consumer Products, is
driven by the beginning of league play in the fall of each year. Operators
typically sign purchase orders, particularly for replacement equipment, during
the first four months of the year, after they receive winter league revenue
indications. Equipment is shipped and installed during the summer months, when
leagues are generally less active. Sales of modernization equipment, such as
automatic scoring and synthetic lane overlays, are less predictable and
fluctuate more than the replacement equipment because of the four to ten year
life cycles of these major products.
The NCP category of Bowling Products experiences significant fluctuations
due to changes in demand for NCPs as certain markets experience high growth
followed by market maturity, at which time sales to that market decline,
sometimes rapidly. Market cycles for individual countries have, in the past,
spanned several years, with periods of high demand for several markets (e.g.,
South Korea and Taiwan) which, in the Company's experience, last five years or
more. Current economic difficulties in certain markets of the Asia Pacific
region have resulted in the reduction in the order rate, level of shipments and
backlog for NCPs. See "--International Operations."
International Operations
The Company's international operations are subject to the usual risks
inherent in operating abroad, including, but not limited to, risks with respect
to currency exchange rates, economic and political destabilization, other
disruption of markets, restrictive laws and actions by foreign governments (such
as restrictions on transfer of funds, import and export duties and quotas,
foreign customs, tariffs and value added taxes and unexpected changes in
regulatory environments), difficulty in obtaining distribution and support,
nationalization, the laws and policies of the United States affecting trade,
international investment and loans, and foreign tax laws.
The Company has a history of operating in a number of international
markets, in some cases, for over thirty years. As in the case of other
U.S.-based manufacturers with export sales, local currency devaluation increases
the cost of the Company's bowling equipment in that market. As a result, a
strengthening U.S. dollar exchange rate may adversely impact sales volume and
profit margins during such periods.
Current economic difficulties in certain markets of the Asia Pacific region
have resulted in a reduction in the order rate, level of shipments and backlog
for NCPs. Management believes that many Asia Pacific customers are delaying
purchases of NCP and modernization equipment as they await the return of
economic stability to their regions. As of March 31, 1998, the NCP backlog was
1,612 units, which represents a reduction of 3.1% compared to a backlog of 1,663
units as of March 31, 1997, and a reduction of 6.6% compared to a backlog of
1,725 units as of December 31, 1997.
For the quarter ended March 31, 1998, NCP sales and backlog to China, Japan
and other Asia Pacific markets represented 53.2% and 62.2% of total NCP unit
sales and backlog, respectively. For the year ended December 31, 1997, NCP sales
and backlog to China, Japan and other Asia Pacific markets represented 72.7% and
70.4% of total NCP unit sales and backlog, respectively.
Foreign currency exchange rates also impact the translation of operating
results from international bowling centers. For the quarter ended March 31,
1998, revenue and EBITDA of international bowling centers represented 13.4% and
12.8% of consolidated results, respectively. For the quarter ended March 31,
1997, revenue and EBITDA of international bowling centers represented 16.4% and
14.5% of consolidated results, respectively. For the year ended December 31,
1997, revenue and EBITDA of international bowling centers represented 14.6% and
16.0% of consolidated results, respectively.
Backlog: Recent NCP Sales
The total backlog of NCPs was 1,612 units as of March 31, 1998,
representing a reduction of 6.6% compared to 1,725 units as of December 31,
1997, and a reduction of 3.1% compared to 1,663 units as of March 31, 1997. NCP
orders included in the backlog are sometimes cancelled by customers in the
normal course of business. Accordingly, the Company has experienced, and expects
to continue to experience, the cancellation of a portion of its NCP orders. NCP
shipments were 504 units for the three months ended March 31, 1998, representing
a reduction of 50.3% compared to shipments of 1,013 units for the three months
ended December 31, 1997, and a reduction of 43.8% compared to shipments of 897
units for the three months ended March 31, 1997, largely attributable to the
recent economic difficulties in the Asia Pacific region. See "--International
Operations."
Impact of Inflation
The Company has historically offset the impact of inflation through price
increases and expense reductions. Periods of high inflation could have an
material adverse impact on the Company to the extent that increased borrowing
costs for floating rate debt may not be offset by increases in cash flow.
Environmental Matters
The Company's operations are subject to federal, state, local and foreign
environmental laws and regulations that impose limitations on the discharge of,
and establish standards for the handling, generation, emission, release,
discharge, treatment, storage and disposal of, certain materials, substances and
wastes.
The Company currently and from time to time is subject to environmental
claims. In management's opinion, the various claims in which the Company
currently is involved are not likely to have a material adverse impact on its
financial position or results of operations. However, it is not possible to
ensure the ultimate outcome of such claims.
The Company cannot predict with any certainty whether existing conditions
or future events, such as changes in existing laws and regulations, may give
rise to additional environmental costs. Furthermore, actions by federal, state,
local and foreign governments concerning environmental matters could result in
laws or regulations that could increase the cost of producing the Company's
products, or providing its services, or otherwise adversely affect the demand
for its products or services.
Recent Accounting Pronouncements
Effective for the fiscal year ended December 31, 1998, the Company is
required to adopt Statement of Financial Accounting Standard ("SFAS") No. 130
"Reporting Comprehensive Income", SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information and SFAS No. 132 "Employers' Disclosures
About Pensions and Other Post-Retirement Benefits." The Company does not expect
that adoption of these standards will have a material impact on the Company's
financial position or results of operations. See "Note 2. Significant Accounting
Policies - Comprehensive Income" in the Notes to Condensed Consolidated
Financial Statements regarding adoption of SFAS No. 130.
Year 2000
The Company is currently developing and installing new worldwide financial,
information, retail and operational systems. Worldwide system implementation is
expected to be complete by December 31, 1999. In connection with this
implementation, system programs have been designed so that the year 2000 will be
recognized as a valid date and will not affect the processing of date-sensitive
information. As of March 31, 1998, the Company spent a total of $14.8 million on
systems installation. The Company expects to spend an additional $5.4 million to
complete the installation. In addition, the Company sells automatic scoring that
is computerized and has developed a software program for a cost to the Company
of approximately $50,000 that will address the year 2000 issue in its automatic
scoring. This software will be made available to customers with service
contracts at no cost and will be sold to customers without service contracts.
The Company believes that the year 2000 issue is being appropriately addressed
through the implementation of these new systems and software development and
does not expect the year 2000 issue to have a material adverse impact on the
financial position, results of operations or cash flows in future periods.
PART II
Item 1. Legal
The Company currently and from time to time is subject to claims and
actions arising in the ordinary course of its business, including environmental
claims, discrimination claims, workers' compensation claims, and personal injury
claims from customers of Bowling Centers. In some actions, plaintiffs request
punitive or other damages that may not be covered by insurance. In management's
opinion, the claims and actions in which the Company is involved will not have a
material adverse impact on its financial position or results of operations.
However, it is not possible to assure the outcome of such claims and actions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Indenture, dated as of May 12, 1998, between AMF Bowling, Inc.
and The Bank of New York, as trustee, with respect to zero
coupon convertible debentures.
10.1 Registration Rights Agreement, dated as of May 12, 1998, by
and among AMF Bowling, Inc. and certain other parties thereto,
with respect to zero coupon convertible debentures.
27.1 Financial Data Schedule for the three months ended March 31,
1998.
(b) Reports on Form 8-K: None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly authorized this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMF Bowling, Inc.
(Registrant)
/s/ Stephen E. Hare May 15, 1998
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Stephen E. Hare
Executive Vice President,
Chief Financial Officer
(Duly Authorized Officer)
/s/ Michael P. Bardaro May 15, 1998
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Michael P. Bardaro
Vice President, Corporate Controller
and Assistant Secretary
(Chief Accounting Officer)